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Budget cuts help Italy to raise €9bn on markets

ITALY'S cost of borrowing halved yesterday as a new package of budget austerity measures and an injection of cheap long-term money from the European Central Bank (ECB) won over the year-end markets.

Italy raised €9bn at a rate of 3.2pc. However, some analysts suggested that European banks making use of low-cost ECB money were largely behind the auction's success.

Yesterday's rate was half the 6.5pc that Italy was forced to pay in November. Italy also raised €1.73bn in two-year notes at a rate of 4.8pc.

European stocks rose and the euro edged upwards in response to the positive auction results.

"This is the first piece of good news for Italy's bond market since the crisis erupted (for Rome) in July," market analyst Nicholas Spiro said.

Funding pressure

However, a tougher test of the market sentiment will come today when Italy aims to sell €8.5bn in longer-term bonds. Analysts warned market nerves could easily reignite when Italy tries to sell seven and 10-year bonds.

The auction result came as eurozone banks deposited a record amount of overnight funds at the ECB on Tuesday night.

Banks remain extremely wary of lending to each other amid concern about the capacity of the other banks to repay the loans.

Official data released yesterday showed that eurozone banks put €452bn on deposit for 24 hours, beating the previous record of €418bn set earlier this week.

The level of deposits at the ECB is an indicator of the reluctance of banks to lend to each other on the pivotal interbank market.

The money deposited earns an interest rate of 0.25pc, which is less than the rate available on the interbank market.

Last week, 523 banks borrowed a record €489.2bn from the ECB in a brand-new three-year lending facility, a move which the European Systemic Risk Board said would ease funding pressures on banks.

The ECB agreed to make the cash available so as to avert a possible credit crunch, charging just 1pc interest.

But the deposit data suggests the banks are now simply parking the cash with the ECB.

Since the ECB flooded eurozone banks with cash, Italy and Spain's six-month debt costs also more than halved.

Doubts about how much of the ECB money would find its way to troubled government bonds have weighed on Italian and Spanish yields and investors are mindful that Rome must refinance some €91bn in bonds in the first four months of next year.

While Rome can count on a healthy appetite from domestic retail investors for short-term bonds and bills, longer-term debt sales are a better measure of underlying interest from external buyers.

"Demand for short-term paper is good. It remains to be seen whether this extends to the longer maturities," said Credit Agricole strategist Peter Chatwell.

Reform agenda

Italy paid a euro lifetime record high yield of 7.56pc to sell 10-year bonds at the end of November.

Standard & Poor's -- which is expected to release its eagerly awaited verdict on debt ratings for 15 eurozone countries in January -- has warned the first quarter of next year will be "tough", especially for Italy.

In a push to regain market confidence, Italy's parliament gave the final seal in the run-up to Christmas to an emergency austerity budget rushed through by a new technocrat government.

Market attention has now turned to the reform agenda of Prime Minister Mario Monti who has promised to tackle Italy's chronic low-growth problems inherited from the Berlusconi era. (Additional reporting, Reuters)

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